Environment & Poverty Times No. 5

Stocks, bonds and … trees

By Piet Klop, World Resources Institute

Plenty has been written about the economic rationale of investing in environmental management in order to help reduce poverty. But for the investments to be made at the scale that is needed, the relevant question now is whether there is also a financial rationale for investing in the sustainable management of natural resources?

An interesting answer is provided by the Dutch pension fund giant ABP, which recently took a 60 per cent share in the USD 100 million Global Solidarity Forest Fund (GSFF), a body which aims at the reforestation, restoration and responsible management of a total of about 450,000 hectares of forests in Sub-Saharan Africa.

The Global Solidarity Forest Fund (GSFF) is managed by an international asset management company that is owned by the Diocese of Västerås (Sweden), Lutheran Church of Sweden and the Norwegian Lutheran Church Endowment.

GSFF investments include a project in Mozambique which plans the reforestation and responsible management of 46,000 hectares of land as well as the conservation of another 45,000 hectares in Niassa province in the north of the country. The Mozambique project is a joint venture between the Diocese of Västerås and its twin Diocese of Niassa (Church of the Province of South Africa) which will own 10 per cent of the shares in the enterprise.

The forests being created will include pine, teak and eucalyptus plantations, as well as areas with indigenous hardwood tree species. The project aims to establish manufacturing plants in the area producing finished products such as certified charcoal and high-quality, Forest Stewardship Council (FSC) certified sawn timber. It is expected that these enterprises will employ mainly local labour. Local communities will be allowed to take a certain quantity of wood from the concessions – and will also be invited to help protect the forests from fires and illegal logging.

The venture is expected to help alleviate the local problems of forestry depletion (caused partly
by unsustainable charcoal production), provide legitimate supplies of hardwood to satisfy international demand and also to make a good profit for its investors.

But why would a pension fund which has a “fiduciary responsibility” – that is an obligation to act in the best financial interests of its shareholders or participants, in this case Dutch government employees – invest in such a venture in a developing country?

From ABP’s point of view, investments in forests and timber are attractive due to the stable and potentially high returns they are capable of generating. According to the pension fund, a total annual return of 13 per cent on investment is realistic and possible. Better still, these returns are not subject to the ups and downs of other investment categories such as bonds or stocks: by spreading its investments in this manner ABP can balance its risks and returns.

Apart from timber-related returns, pension funds like ABP see sustainable forestry as part of a strategy to combat climate change as trees soak up carbon dioxide, the main greenhouse gas. The production of biomass – wood chips or pellets – is another attraction of investing in forest projects.

ABP and other pension funds are likely to increase the share of such investments in their portfolios as in many ways forests and timber represent a natural fit for the long term investment of pensions.

But why Mozambique? According to Dr Åsa Tham, GSFF’s chief executive officer, Mozambique was selected for the ABP investment because the country had demonstrated long-term political stability and has a government committed to the concept of responsible forestry. GSFF has committed itself to the ten universal principles of the United Nations Global Compact. These principles require a responsible policy in the areas of human rights, labour, environment and anti-corruption. Dr Åsa Tham says GSFF welcomed “an opportunity to invest in Sub-Saharan Africa with good returns while at the same time strengthening the economic foundation of local society.”

Financial flows for developing countries

With increased globalization and a “smaller world”, money flows more easily and the flows have increased. Where aid once represented a majority of the funds from high-income countries to developing countries, this has now been surpassed by investments and worker’s remittances, and these flows show no sign of slowing down – maybe only pausing for an occasional downturn in the global economy. The question is: when will this start to show as a decrease in poverty, as indicators show that little of this money directly benefits the poor?

“I firmly believe that if investors take a longer range view that incorporates environmental and social factors it will help meet a common goal of the United Nations and the private sector: stronger and sustainable markets.”